Stephen Bainbridge's Journal of Law, Religion, Politics, and Culture

August 2018

08/29/2018

The sex abuse charges now roiling the Catholic Church are a serious matter. But this tweet reminded me of one of my favorite cases, which is not very serious:

“The only valid reason for using RICO against the Vatican or any entity of the Catholic church, in the context of child sexual abuse, is to gain publicity or access to more clients,” said Notre Dame law prof G. Robert Blakey, the nation’s foremost expert on racketeering law. 2002

In 1968, William Sheffield visited the ancient Hospice du Grand St. Bernard in Switzerland, a monastery of the Canons Regular of St. Augustine, a Roman Catholic religious order of priests. While in Switzerland, Sheffield contracted with the cleric in charge, Father Bernard Cretton, to buy a St. Bernard dog for $175 plus the $125 freight to ship the dog to Sheffield’s home in California. Sheffield was to pay the price in $20 installments and Cretton agreed to ship the dog upon receipt of the first $20.[1]

Sheffield made three $20 payments, but the monastery refused either to ship a dog or to refund his money. Sheffield then sued in California state court for the price of his substitute dog ($200) and his non-refunded $60. In the suit, he named Cretton, the Canons Regular, the Vatican, the Pope, and the local archdiocese (in the person of then-presiding Archbishop of San Francisco).[2]

Although Sheffield apparently was able to serve process on and obtain personal jurisdiction with respect to the Archbishop of San Francisco, he faced significant obstacles in doing so with respect to both the Pope and the monastic defendants. In an attempt to circumvent those problems, Sheffield invoked the alter ego doctrine:

The complaint alleges that defendants Archbishop and the Canons Regular of St. Augustine were controlled and dominated by defendants Roman Catholic Church, the Bishop of Rome and the Holy See, that there exists a “unity of interest and ownership between all and each of the defendants,” that the Archbishop and the Canons Regular were a “mere shell and naked framework which defendants Roman Catholic Church, The Bishop of Rome, and The Holy See, have used and do now use as a mere conduit for the conduit of their ideas, business, property, and affairs,” and that all defendants are “alter egos” of each other.[3]

The court rejected Sheffield’s argument, holding that the “uncontroverted” evidence that “the Archbishop had no dealings with the Canons Regular negates any possibility that the Archbishop so controlled and dominated that organization so as to be liable for its actions under the ‘alter ego’ doctrine.”[4]

08/28/2018

Jesus said:"Woe to you, scribes and Pharisees, you hypocrites.You pay tithes of mint and dill and cummin,and have neglected the weightier things of the law:judgment and mercy and fidelity.But these you should have done, without neglecting the others.Blind guides, who strain out the gnat and swallow the camel!

"Woe to you, scribes and Pharisees, you hypocrites.You cleanse the outside of cup and dish,but inside they are full of plunder and self-indulgence.Blind Pharisee, cleanse first the inside of the cup,so that the outside also may be clean."

"You ... have neglected ... fidelity." That strikes me as to core problem. Too many priests and bishops have been unfaithful to the vows they took. What is needed is a mechanism to enforce fidelity.

In the wake of the 2016 US Presidential election and similar developments in parts of Europe, commentators widely acknowledged the rise of populist movements on both the right and left of the political spectrum that both were deeply suspicious of big business. This development potentially has important implications for the law and practice of corporate purpose.

Left of center corporate social responsibility campaigners have long advocated the use of “boycotts, shareholder activism, negative publicity, and so on” to pressure corporate managers to act in ways those campaigners deem socially responsible. Right of center populists could use the same tactics to induce corporate directors to make decisions they favor. The question thus is whether they are likely to do so based on their historical track record.

Assuming for the sake of argument that right-of-center populists begin focusing on corporate purpose, the question arises whether modifying the shareholder wealth maximization norms so as to give managers more discretion to take the social effects of their decisions into account would lead to outcomes populists would view as desirable. Populists historically have viewed corporate directors and managers as elites opposed to the best interests of the people. Today, right of center populists find themselves increasingly at odds with an emergent class of social justice warrior CEOs, whose views on a variety of critical issues are increasingly closer to those of blue state elites than those of red state populists.

Finally, this article reverses field by suggesting that the case for Delaware’s rule of shareholder wealth maximization becomes even stronger when right-wing populists have significant political power. A resurgent right-wing populism may provide alternative constraints on corporate political power sufficient to revitalize the argument for leaving regulation of corporate externalities to general welfare legislation.

08/23/2018

It is the teaching authority of the Church. In the exercise of that office, the Church develops Tradition.

Cathechism ¶ 85: “The task of giving an authentic interpretation of the Word of God, whether in its written form or in the form of Tradition, has been entrusted to the living, teaching office of the Church alone. Its authority in this matter is exercised in the name of Jesus Christ.” This means that the task of interpretation has been entrusted to the bishops in communion with the successor of Peter, the Bishop of Rome.”

Catholics are required to assent to the magisterium, but there are different degrees of assent.

When the Pope speaks ex cathedraor the Church speaks as a General Council, Catholics are obliged to give “full assent of faith.” As to the ordinary teaching of the Church, Catholics are required to give religious assent. What’s the difference?

Ordinary teachings allow for the possibility of error and so ordinary assent allows for the possibility of dissent.

Is CST part of the magisterium?

The Compendium states: “Insofar as it is part of the Church's moral teaching, the Church's social doctrine has the same dignity and authority as her moral teaching. It is authentic Magisterium, which obligates the faithful to adhere to it.” (80)

But the Church recognizes a special competence of the laity with respect to social problems: “It is not a prerogative of a certain component of the ecclesial body but of the entire community; it is the expression of the way that the Church understands society and of her position regarding social structures and changes. The whole of the Church community — priests, religious and laity — participates in the formulation of this social doctrine, each according to the different tasks, charisms and ministries found within her.” (75)

One commentator observes: “We are bound to obey in those social issues that are strictly defined (abortion, marriage, pornography, contraception, etc.). However, in the great majority of social, political, and economic questions, the Church gives principles that allow the laity to apply them as best they can, according to their understanding of the problem.”

So, does the Church expect practicing Catholics to have CST in mind when they act as citizens?

“The lay faithful are called to identify steps that can be taken in concrete political situations in order to put into practice the principles and values proper to life in society.” (568)

Do catholic lawyers have an exclusive role in making CST part of society? No. Silecchia observes that “it is telling that this body of doctrine is not called ‘Catholic legal teaching,’ but is, instead, called ‘Catholic social teaching.’" Lucia A. Silecchia, Catholic Social Teaching and Its Impact on American Law, 1 Journal of Catholic Social Thought 277 (2004)

One question to consider as we examine CST is whether any American political party is fully consistent with Church teachings.[1]

This year I'm again teaching a seminar at UCLAW on "Catholic Social Thought, the Law, and Public Policy." Here's the course description:

In contemporary American culture there is a widespread assumption that religion is something private, something one does with one's leisure time, and that it ought not to affect the way one acts in the public square or market place. Catholic social teaching, however, explicitly claims a place in the public square. As the National Conference of Catholic Bishops explained in their Pastoral Letter on Catholic Social Teaching and the U.S. Economy (1986), they wrote that letter not merely to instruct the faithful but also “to add our voice to the public debate” over economic justice. Likewise, many Papal encyclicals are not mere theological documents, but also serve as position paper addressed to policymakers.

Catholic social thought is particularly relevant to law and the practice of law. As Avery Cardinal Dulles observed, law “cannot be adequately taught without reference to the purposes of society and the nature of justice, which law is intended to serve.” In turn, as he also argued, “the role of law and its place in a well-ordered society has been studied in depth for many centuries in Catholic social theory.” Accordingly, the premise of this seminar is that whether one is a follower of Catholicism, some other religion, or no religion, Catholic social thought provides important insights for making and practicing law.

Students of all religions—or of no religion—are invited and welcome to engage with the material respectfully, thoughtfully, and critically.

The course will focus on the primary documents of Catholic social thought, principally Papal Encyclicals, rather than secondary sources. The goal is for students to directly engage the source material.

There are three ways of studying Catholic Social Thought (CST), a.k.a. Catholic Social Teaching. First, we might approach it thematically, by which I mean emphasizing the major themes that run through the entire body of encyclicals and other documents that make up CST’s corpus. Scholars have identified seven such major themes or principles:

Life and the Dignity of the Human Person.

The Call to Family, Community, and Participation.

Human Rights and Responsibilities.

The Preferential Option for the Poor.

The Dignity of Work and the Rights of Workers.

Solidarity with Others Across Racial, National, Social, and Other Borders.

Care for God’s Creation.

Second, we might seek to operationalize CST by focusing on how it speaks to specific issues. The Compendium of the Social Doctrine of the Church takes this approach, expounding the social doctrine across numerous distinct issues of modern life.

Third, we might directly engage the primary documents, especially the critical papal encyclical. This is the approach I’ve chosen. The other approaches are useful, but only if you have a foundation on which to build them. Attempting them without first knowing the foundational documents would be like trying to decide constitutional law questions without ever having read the Constitution. Put another way, focusing on the primary documents gives us a perspective that has not been filtered through someone else’s biases and priorities.

Another important reason for focusing on primary documents is that CST rarely offers specific policy proposals. Instead, it offers broad principles and precepts, which often prove to be blunt instruments when making fine legal or policy distinctions. If you ask, “should the law require corporate disclosure quarterly or semi-annually,” CST will give you only broad statements about the economy in reply. But broad principles laid out in the primary documents do provide a moral and ethical foundation upon which to build. Put another way, a house built on sand will not stand. Before you can do high level reasoning you must have a firm foundation on which to build.

I'll be posting about this course a lot, so I have set up a new posts category CST & The Law Seminar. I hope you'll find them of interest.

Sen. Warren’s claim that shareholder rights became dominant in the early 1980s, to the detriment of employees and other constituents, is wrong and ignores decades of history. Beginning in 1933, professional shareholders, led by John and Lewis Gilbert, campaigned successfully to get corporate America to put shareholders first. As early as 1947, these “gadflies” won an important milestone, when federal judge John Biggs Jr. famously wrote in SEC v. Transamerica: “A corporation is run for the benefit of its stockholders and not for that of its managers.”

It wasn’t until the late 1960s that social activists began copying the methods of the gadflies for other ends, like asserting employee rights. The first example was in 1967, when Saul Alinsky successfully challenged Eastman Kodak’s minority hiring practices.

Prof. Lawrence A. Cunningham

Sen. Warren says corporations shouldn’t be accountable only to shareholders. They aren’t. Corporations already answer to various arms of the federal, state and local governments. In fact, before shareholders get any part of a company’s earnings the various levels of government get their cut. Those who supply goods or services to the company get paid. Employees get paid. The banks who lend money to the company get paid. All of these get their due with a high level of certainty. Shareholders get paid last.

Michael J. Clowes

Who wins under this bill? The federal government gets even more power, plaintiff attorneys get more business and progressive politicians don’t need to worry as much about conservative causes getting corporate money. Of course, labor unions and others will continue to pour money into progressive coffers.

One thing we learned from the Obama years is that you cannot beat up American business without harming economic growth. Regulation, litigation and Washington, D.C., power over corporations are far more likely to stifle growth than to benefit workers.

Dana R. Hermanson

And the one that gets my vote for the best of the lot (sorry Larry):

Ms. Warren explains that “75% of directors and shareholders would need to approve before a corporation could make any political expenditures.” Since I pay school taxes, is there a proposal in the pipeline that the teachers unions must gain 75% of the taxpayers’ vote before making political contributions?

08/17/2018

In a WSJ op-ed today, Senator Elizabeth Warren defended her proposed "Accountable Capitalism Act." In a series of posts (linked here), of which this is the last, I have argued that this bill is a very bad idea. In this post, I address her proposal that "At least 75% of directors and shareholders would need to approve before a corporation could make any political expenditures."

In the first place, it is hardly surprising that the fiercely partisan Democrat Warren is backing this idea. The progressive left is convinced that corporate America is bankrolling the GOP and has been trying for years to shut down that funding stream. (I think the politics of corporate America is more complicated than that stereotype, but that's an issue for another post). See my post on Hillary Clinton's rather transparent effort to do so.

But let's set that issue aside and focus on the corporate governance aspects. Under current law, shareholders have no voting rights with respect to corporate political spending. The law in every state is clear that the business and affairs of the corporatiopn are to be conducted by the board of directors and the managers to whom the board delegates authority. Corporate law in this regard is a system of director primacy, not shareholder primacy. Shareholders have no more right to decide where the corporate spends its lobbying dollars than they do to decide where the corporation builds plants or what products the corporation makes. See, e.g., Paramount Commc'ns Inc. v. Time Inc., Nos. 10866, 10670 & 10935, 1989 WL 79880, at *30 (Del. Ch. July 14, 1989) (“That many, presumably most, shareholders would prefer the board to do otherwise than it has done does not, in the circumstances of a challenge to this type of transaction, in my opinion, afford a basis to interfere with the effectuation of the board's business judgment.”), aff'd, 571 A.2d 1140 (Del. 1990).

Put another way, the law recognizes that "Charitable contributions are made by a corporation in the exercise of discretion by the Board of Directors or proper officers, primarily for public relations purposes ...." Hotpoint, Inc. v. U.S., 117 F.Supp. 572 (CT.CL. 1954). Just so, political contributions are (and should remain) within the discretion of the board of directors to be used as they see fit to advance the corporation's interests.

State corporate law provides clearly that the corporation’s business and affairs are “managed by or under the direction of a board of directors.” The vast majority of corporate decisions accordingly are made by the board of directors acting alone, or by persons to whom the board has properly delegated authority. Shareholders have virtually no right to initiate corporate action and, moreover, are entitled to approve or disapprove only a very few board actions. The statutory decision-making model thus is one in which the board acts and shareholders, at most, react.

Shareholder voting thus is simply one of many corporate accountability mechanisms—and not a very important one at that. In theory, of course, shareholders could vote incompetent directors out of office. In the real world, however, so-called proxy contests are subject to numerous legal and practical impediments that render them largely untenable as a tool for disciplining managers. Accordingly, the product, capital, and employment markets are all far more important than voting as a constraint on agency costs. To the extent voting matters, it does so solely because it facilitates the market for corporate control. If agency costs get high enough, it will become profitable for some outsider to acquire a controlling block of shares and exercise their associated voting rights to oust the incumbent board.

... As Delaware’s Chancellor William Allen observed, our “corporation law does not operate on the theory that directors, in exercising their powers to manage the firm, are obligated to follow the wishes of a majority of shares. In fact, directors, not shareholders, are charged with the duty to manage the firm.” Paramount Communications Inc. v. Time Inc., 1989 WL 79880 at *30 (Del. Ch. 1989), aff’d, 571 A.2d 1140 (Del. 1990).

Allen further recognized that the fact that many, “presumably most, shareholders” would have preferred the board to make a different decision “does not . . . afford a basis to interfere with the effectuation of the board’s business judgment.” In short, corporations are not New England town meetings.

It's also worth remembering that the beneficiaries of Bebchuk's incessant pressing of ever expanding shareholder power will not be ordinary investors. Instead, as Roberta Romano observed with respect to union and public pension fund sponsorship of shareholder proposals:

It is quite probable that private benefits accrue to some investors from sponsoring at least some shareholder proposals. The disparity in identity of sponsors—the predominance of public and union funds, which, in contrast to private sector funds, are not in competition for investor dollars—is strongly suggestive of their presence. Examples of potential benefits which would be disproportionately of interest to proposal sponsors are progress on labor rights desired by union fund managers and enhanced political reputations for public pension fund managers, as well as advancements in personal employment. … Because such career concerns—enhancement of political reputations or subsequent employment opportunities—do not provide a commensurate benefit to private fund managers, we do not find them engaging in investor activism.[1]

Recent years have seen a number of efforts to extend the shareholder franchise. These efforts implicate two fundamental issues for corporation law. First, why do shareholders - and only shareholders - have voting rights? Second, why are the voting rights of shareholders so limited? This essay proposes answers for those questions.

As for efforts to expand the limited shareholder voting rights currently provided by corporation law, the essay argues that the director primacy-based system of U.S. corporate governance has served investors and society well. This record of success occurred not in spite of the separation of ownership and control, but because of that separation. Before changing making further changes to the system of corporate law that has worked well for generations, it would be appropriate to give those changes already made time to work their way through the system. To the extent additional change or reform is thought desirable at this point, surely it should be in the nature of minor modifications to the newly adopted rules designed to enhance their performance, or rather than radical and unprecedented shifts in the system of corporate governance that has existed for decades.

And Director Primacy and Shareholder Disempowerment, 119 Harvard Law Review (2006), which was a response to Lucian Bebchuk's article The Case for Increasing Shareholder Power, 118 Harvard Law Review 833 (2005). In that article, Bebchuk put forward a set of proposals designed to allow shareholders to initiate and vote to adopt changes in the company's basic corporate governance arrangements.

In response, I made three principal claims:

First, if shareholder empowerment were as value-enhancing as Bebchuk claims, we should observe entrepreneurs taking a company public offering such rights either through appropriate provisions in the firm's organic documents or by lobbying state legislatures to provide such rights off the rack in the corporation code. Since we observe neither, we may reasonably conclude investors do not value these rights.

Second, invoking my director primacy model of corporate governance, I present a first principles alternative to Bebchuk's account of the place of shareholder voting in corporate governance. Specifically, I argue that the present regime of limited shareholder voting rights is the majoritarian default and therefore should be preserved as the statutory off-the-rack rule.

Finally, I suggest a number of reasons to be skeptical of Bebchuk's claim that shareholders would make effective use of his proposed regime. In particular, I argue that even institutional investors have strong incentives to remain passive.

Some legal ideas are so wacky, they can only come from a law professor. Unfortunately, one of those is Sen. Warren, who wants to reverse the principles of US corporate governance that have enabled our economy to thrive, writes @JamesRCopland:https://t.co/Nb1y9g6Nrp

The Accountable Capitalism Act [that she recently introduced in Congress] ... would give workers a stronger voice in corporate decision-making at large companies. Employees would elect at least 40% of directors.

In effect, she would mandate a version of codetermination. Early in my career I wrote a series of articles explaining why employee involvement in corporate governance is a fundamentally bad idea:

In my (sadly out of print) book Corporation Law and Economics, my analysis of corporate voting rights begins by showing that public corporation decisionmaking must be conducted on a representative rather than participatory basis. It further demonstrates that only one constituency should be allowed to elect the board of directors. It then turns to the question of why shareholders are the chosen constituency, rather than employees. In this blog post, I focus on the latter issue, since that it the key issue raised by Warren's bill.

The standard law and economics explanation for vesting voting rights in shareholders is that shareholders are the only corporate constituent with a residual, unfixed, ex post claim on corporate assets and earnings.[1]In contrast, the employees’ claim is prior and largely fixed ex ante through agreed‑upon compensation schedules. This distinction has two implications of present import. First, as noted above, employee interests are too parochial to justify board representation. In contrast, shareholders have the strongest economic incentive to care about the size of the residual claim, which means that they have the greatest incentive to elect directors committed to maximizing firm profitability.[2]Second, the nature of the employees’ claim on the firm creates incentives to shirk. Vesting control rights in the employees would increase their incentive to shirk. In turn, the prospect of employee shirking lowers the value of the shareholders’ residual claim.

At this point, it is useful to once again invoke the hypothetical bargain methodology. If the corporation’s various constituencies could bargain over voting rights, to which constituency would they assign those rights? In light of their status as residual claimants and the adverse effects of employee representation, shareholders doubtless would bargain for control rights, so as to ensure a corporate decisionmaking system emphasizing monitoring mechanisms designed to prevent shirking by employees, and employees would be willing to concede such rights to shareholders.

Granted, collective action problems preclude the shareholders from exercising meaningful day-to-day or even year-to-year control over managerial decisions. Unlike the employees’ claim, however, the shareholders’ claim on the corporation is freely transferable. As such, if management fails to maximize the shareholders’ residual claim, an outsider can profit by purchasing a majority of the shares and voting out the incumbent board of directors. Accordingly, vesting the right to vote solely in the hands of the firm’s shareholders is what makes possible the market for corporate control and thus helps to minimize shirking. As the residual claimants, shareholders thus would bargain for sole voting control, in order to ensure that the value of their claim is maximized. In turn, because all corporate constituents have an ex ante interest in minimizing shirking by managers and other agents, the firm’s employees have an incentive to agree to such rules.[3]The employees’ lack of control rights thus can be seen as a way in which they bond their promise not to shirk. Their lack of control rights not only precludes them from double-dipping, but also facilitates disciplining employees who shirk. Accordingly, it is not surprising that the default rules of the standard form contract provided by all corporate statutes vest voting rights solely in the hands of common shareholders.

To be sure, the vote allows shareholders to allocate some risk to prior claimants. If a firm is in financial straits, directors and managers faithful to shareholder interests could protect the value of the shareholders’ residual claim by, for example, financial and/or workforce restructurings that eliminate prior claimants. All of which raises the question of why employees do not get the vote to protect themselves against this risk. The answer is two-fold. First, as we have seen, multiple constituencies are inefficient. Second, as addressed below, employees have significant protections that do not rely on voting.

Suppose a firm behaves opportunistically towards it employees. What protections do the employees have? Some are protected by job mobility. The value of continued dealings with an employer to an employee whose work involves solely general human capital does not depend on the value of the firm because neither the employee nor the firm have an incentive to preserve such an employment relationships. If the employee’s general human capital suffices for him to do his job at Firm A, it presumably would suffice for him to do a similar job at Firm B. Such an employee resembles an independent contractor who can shift from firm to firm at low cost to either employee or employer.[4]Mobility thus may be a sufficient defense against opportunistic conduct with respect to such employees, because they can quit and be replaced without productive loss to either employee or employer. Put another way, because there are no appropriable quasi-rents in this category of employment relationships, rent seeking by management is not a concern.

Corporate employees who make firm-specific investments in human capital arguably need greater protection against employer opportunism, but such protections need not include board representation. Indeed, various specialized governance structures have arisen to protect such workers. Among these are severance pay, grievance procedures, promotion ladders, collective bargaining, and the like.[5]

In contrast, shareholders are poorly positioned to develop the kinds of specialized governance structures that protect employee interests. Unlike employees, whose relationship to the firm is subject to periodic renegotiation, shareholders have an indefinite relationship that is rarely renegotiated, if ever. The dispersed nature of stockownership also makes bilateral negotiation of specialized safeguards difficult. The board of directors thus is an essential governance mechanism for protecting shareholder interests.

If the foregoing analysis is correct, why do we nevertheless sometimes observe employee representation? An explanation consistent with our analysis lies close at hand. In the United States, employee representation on the board is typically found in firms that have undergone concessionary bargaining with unions. Concessionary bargaining, on average, results in increased share values of eight to ten percent.[6]The stock market apparently views union concessions as substantially improving the value of the residual claim, presumably by making firm failure less likely. While the firm’s employees also benefit from a reduction in the firm’s riskiness, they are likely to demand a quid pro quo for their contribution to shareholder wealth. One consideration given by shareholders (through management) may be greater access to information, sometimes through board representation. Put another way, board of director representation is a way of maximizing access to information and bonding its accuracy. The employee representatives will be able to verify that the original information about the firm’s precarious financial situation was accurate. Employee representatives on the board also are well-positioned to determine whether the firm’s prospects have improved sufficiently to justify an attempt to reverse prior concessions through a new round of bargaining.

08/16/2018

As noted in a prior post, Senator Elizabeth Warren has introduced a bill that would require "corporate directors to consider the interests of all major corporate stakeholders—not only shareholders—in company decisions. Unlike state non shareholder constituency statutes, which are merely permissive, her bill would mandate such consideration.

As Stefan Padfield has noted:

There should be no doubt that imposing mandatory consideration of stakeholders on directors in carrying out their oversight responsibilities carries meaningful risk of undermining the wealth creation and innovation benefits of the corporate form as currently constituted.This general criticism has been well vetted elsewhere, and I will not rehash the debate here, though my declining to do so should not be construed as my being dismissive of relevant concerns regarding statism.

Because shareholder wealth maximization is the right rule, as we discussed in the preceding post, mandating that directors consider non-shareholder interests in making corporate decisions is clearly wrong in and of itself.

In contrast, many rules of state corporate law are enabling rather than mandatory. This is efficient because default rules are preferable to mandatory rules in most settings.[1] So long as the default rule is properly chosen, of course, most parties will be spared the need to reach a private agreement on the issue in question. Default rules in this sense provide cost savings comparable to those provided by standard form contracts, because both can be accepted without the need for costly negotiation. At the same time, however, because the default rule can be modified by contrary agreement, idiosyncratic parties wishing a different rule can be accommodated. Given these advantages, a fairly compelling case ought to be required before we impose a mandatory rule.[2] Mandatory rules are justifiable only if a default rule would demonstrably create significant negative externalities or, perhaps, if one of the contracting parties is demonstrably unable to protect itself through bargaining.

The use of mandatory rules at the federal level is particularly deplorable. If a state adopts an inefficient mandatory rule (see, e.g., much of California corporate law) corporations can respond by reincorporating in a state whose law is more enabling. Obviously, however, few corporations will seriously consider shifting their corporate headquarters to another country to avoid inefficient federal corporate laws. (Having said that, of course, many companies might go private (a.k.a. go dark) in response, as many did in response to SOX and Dodd-Frank.)

Unlike Delaware corporate law, which is typically updated annually to correct errors and improve the law, the federal government rarely revisits mistakes like SOX and Dodd-Frank. So we get stuck with bad federal rules.